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RWE, Engie studying tie-up to create Franco-German energy giant

Friday, May 19, 2017 - 20:41

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RWE and Engie are studying a possible share swap that could create a Franco-German giant in power grids, renewables and energy services with a market value of about 50 billion euros (S$77.5 billion).

[FRANKFURT] RWE and Engie are studying a possible share swap that could create a Franco-German giant in power grids, renewables and energy services with a market value of about 50 billion euros (S$77.5 billion).

Options being looked at could involve RWE swapping part or all of its majority stake in renewables and grids firm Innogy in exchange for a minority stake in Engie, four investment banking sources said.

No active talks between the top executives of the two firms are under way, but the two utilities are discussing options and scenarios with advisers and bankers, the sources told Reuters. At this stage, no banks have been given a formal mandate.

"There are indeed talks ongoing, but that does not mean they will succeed," a French government source said.

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An RWE-Engie deal would form the basis of a Franco-German alliance in the field of energy, which has been advocated for years by the previous French government of President Francois Hollande.

Any combination would have to wait for German elections in September, bankers said, although one added that since the deal would not involve any plant closures and enhance French-German industrial cooperation, things could move very quickly.

Shares in the three companies jumped on the news, with RWE rising more than five per cent, making it the top gainer in the Dax index.

Innogy shares also rose more than five were up 4.1 per cent per cent after rising more than five per cent and stood 4.8 per cent higher in early afternoon trade. Engie shares initially rose 1.2 per cent, then gave up their gains.

A spokeswoman for Engie declined to comment but reiterated that Chief Executive Isabelle Kocher - following a Bloomberg report in March about Engie weighing a bid for Innogy - that Engie had no plans for a transformative deal.

Innogy and RWE declined to comment. The German economy ministry declined to comment.

One scenario that has emerged would see RWE swap part or all of its 76.79 stake in its listed unit Innogy for a direct minority stake in Engie.

Bankers said that because of the strong undervaluation of RWE shares, such an operation could only take the form of an asset swap, not a cash deal. A certain cash component could be an option to adjust for differences in valuation.

Talk of interest in German utilities reflects efforts by RWE and rival E.ON to restructure after Germany's focus on promoting renewable energy virtually destroyed their established business model of selling power from fossil-fuel plants.

Engie's CEO Kocher is pushing a strategy shift to focus the former French monopoly gas utility more into grids and renewables.

RWE's stake in Innogy - whose market cap was 18.6 billion euros at the Thursday close - is worth about 14.3 billion, but RWE's own market capitalisation is just 9.6 billion, which means that all its other coal, nuclear and other energy assets are effectively assigned a negative value by the market.

One banker said that swapping its Innogy stake into that unit could give RWE a stake of up to one third in the new group.

Bankers say that any transaction would have to ensure a balance of power between RWE and the French state.

With the value of the French state's 28.65 per cent stake in Engie at just under 10 billion euros, an asset swap involving all of Innogy could dilute French state holding company APE's Engie stake to about 20 per cent in Engie-Innogy.

One banker said that RWE could contribute less than its entire stake in Innogy in a deal that would give RWE and the French state equal stakes of about 25 per cent each.

This would require a law change in France, as the government is legally required to hold a one third stake in Engie. Bankers said this is unlikely to be a problem for the new government of centrist President Emmanuel Macron.

REUTERS

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